Copper fundamentals strong; Mitsubishi ups stake in Escondida (May 03, 2010)

Three large Japanese companies are investing a total of more than 50 billion yen ($533.9 million) for an additional combined ownership stake of 2.5% in Chile’s Escondida mine, Reuters news agency reported on April 13, quoting Japan’s Nikkei Business Daily.

The new investment will raise the combined stake of Mitsubishi Corp., Nippon Mining & Metals a unit of JX Holdings, and Mitsubishi Materials, from their current 10% stake in Escondida to 12.5%.

Nippon Mining and Mitsubishi Materials will use the additional supply from Escondida to produce copper ingots, according to the news reports.

Both Japan and China are set to remain net copper importers this year and the fundamentals for the red metal look strong with prices likely to trend higher in the fourth quarter of 2010 and into next year, many analysts predict. Preliminary estimates of China’s first quarter gross-domestic-product growth — a sizzling 11.9% — exceeded expectations and lent further support to copper prices.

Copper prices have more than doubled over the past 15 months, despite a surplus in the copper market last year of 777,000 tonnes. Prices jumped 141% from their low in January of about US$3,000 per tonne to a peak of US$7,346 per tonne by the end of the year, according to Copper Survey 2010, GFMS’s inaugural annual survey of the metal.

The price increase was supported by strong investment demand throughout the year, official stockpiling in China, and “modest improvements” in supply-demand conditions, the survey noted. GFMS argues that the outlook for copper prices in the long term is “positive.”

“Given projections of a persistently tight concentrate market, it is difficult to see how production will be able to keep up with the consumption recovery expected going forward,” GFMS outlined in a press release announcing the launch of its survey.

But GFMS concedes that the copper price is already at “elevated” levels and that “in the upper US$7,000, it is difficult to see a new wave of money moving into the market, at least until the time when supply shortages emerge.”

GFMS forecasts that, as the market moves into deficit towards the end of this year, strong investment demand “is likely to re-emerge.”

“This will probably lead to more noteworthy advances and GFMS would expect copper prices to exceed US$8,000 tonne before the end of the year.”

Others are equally bullish on copper. Bank of America Merrill Lynch analysts argue in an April 12 research report that while “immediate significant upside to copper may be limited in 2010,” they are forecasting a market deficit in 2011 and believe that prices could surpass US$8,800 per tonne (or US$3.99 per lb.).

In the shorter term, the bank is maintaining an average copper price forecast of US$7,275 per tonne (US$3.30 per lb.), although a “seasonal spike above US$8,000 per tonne (US43.63 per lb.) in the 2Q2010 is nevertheless likely.”

In recent comments during the CRU/ CESCO copper week in Santiago, Chile, Andrew Harding, head of copper for Rio Tinto predicted a “meaningful” deficit in the global supply of copper in 2011 after a balanced market this year. He also noted that if near-term demand from China and India doesn’t meet expectations, China may have to draw down strategic reserves.